Entrepreneurs wear many hats – marketing, sales, human resources and finance. Financing a business can seem the most daunting task especially if your company is growing rapidly. There will be days it seems the cash outflow is way faster than the cash inflow even if you are selling to stellar businesses.
So how can a fast growing company increase cash inflow? Simple, factoring. Factoring is really an early pay option where you can offer your customer terms and still have access to the cash flow early. Factoring involves the leveraging of your accounts receivable and is a great strategy to put the cash you expect to receive from customers into your hands faster.
Here are some tips on how to get the most out of factoring!
Sounds simple but you should only seek to factor when you are in need of working capital. Factors earn a fee the longer a factored invoice is outstanding so it make sense to time cash inflow with cash out flow. For example, if your customers have 30 days to pay their invoices instead of factoring invoices on the date of the invoice, hold the invoices for 15 days. This allows you to reduce the factoring fee since the factor will only have funds out for 15 days versus 30 days.
Plan Cash Flow
If you operate a seasonal business or have customers who are slow to pay, then you should be able to forecast in advance when you will experience working capital shortfalls. Do a monthly forecast to calculate your expenses and accounts receivable, so that you know how much money is going out and how much is projected to come in. This will give you a better understanding of when to turn to factoring and how much capital should be requested.
Don’t Factor all Customers
How much capital do you actually need? Use this number to figure out which customers to factor. Since the cost to factor is based on how much time a factored invoice is outstanding, don’t factor your slow pay customers. Instead select credit worthy customers who pay in 45-60 days. Doing this will allow you to get the capital that is needed and avoid paying fees for funds beyond your actual cash needs.
Sell Your Customers On Factoring
Tell your customers you were approved for a great line of credit that will allow you to grow and expand the business. Let the customers know you are also outsourcing some of the accounts receivable function to the factor and the factor will help manage collections. This will help your customers understand what the factor’s role is and how important the factor is to your growth which equates to better service and products for the customers. It is a win-win!